Introduction
Islamabad is facing a serious shortage of residential and commercial units despite the fact that it is the second most popular place to buy a commercial or residential plot after Lahore1. The shortage primarily owes to an increasingly greater number of people pouring in the capital city for past several years2. However, the problem becomes more intense when the extraordinary rise in the prices makes it impossible for buyers to afford investment in the sectors developed by the Capital Development Authority- the capital territory regulator.
What are the factors behind this price hike? Do prices of real estate in Pakistan reflect true supply and demand?
Capital Development Authority (CDA, or the Authority) is responsible to develop new sectors in the city. CDA also defines zoning and height restrictions for development of land. The developed sectors of Islamabad are sold to general public via balloting and auctioning in which CDA sets a reserve price. The profits generated by the sale of land are then utilised to run the non-development expenditures of the Authority.
The increasing demand and inelastic supply of real estate does not seem to be solely responsible for the prices of real estate in Islamabad. However, it is believed that price mechanism and the resultant speculative investment is somehow responsible for the price hikes in the real estate of Islamabad Capital Territory.
The purpose of this paper is to find out the pricing mechanism by taking CDA as a case study. The paper will investigate the possible effect of speculation on investment and study the impact of price speculation on the demand of real estate. This will attempt to answer this question: how does investment speculation influence effective demand of real estate?
Further, the research will explain whether zoning and height regulations affect supply of real estate for different segments of the actual market in Pakistan.
The paper is structured as follows: 1) Real estate trend analysis; 2) How prices are determined in real estate? And; 3) conclusions and recommendations.
